3 Signs It’s Time to Refinance Your Mortgage

You’ve been paying your mortgage for a few years, and interest rates go down. Suddenly, you hear everyone talking about how now is the time to refinance your mortgage… banks, credit union, friends, family. And while you’re somewhat familiar with the concept of refinancing, you don’t know if it’s in your best interest to do so right now. You might actually be asking yourself, “What are some signs you should refinance your mortgage?”

Here are some key signs that it’s time to do so.

1. Refinancing at the new interest rate would save you significant money in the long term.

When you first start paying off your mortgage, the majority of what you’re paying goes toward interest. Because of that, when you’re still early on in making your mortgage payments, you can save a lot of money if you’re able to pay off your loan in the same amount of time but at a lower interest rate.

For example, if you originally were approved for a 30-year mortgage at 3.6% for $200,000, and you still have 25 years left on your mortgage, and you can refinance at 3.4%, you would save $80,000 over the next 25 years, assuming the new loan had a term of 25 years. In addition, your loan payments would be less. In this example scenario, you’d be paying approximately $20 less each month after refinancing.

Keep in mind: because you’re paying more interest early on in your mortgage, it will make most financial sense to refinance early on when making your payments, if interest rates decrease. To see how much you could save by refinancing, try our mortgage calculator.

2. You can decrease the length of your loan from 30 years to 20 or 15.

Often, homeowners look to refinance their mortgage after a few years. Since most people have a 30-year mortgage, they probably have 20-25 years remaining on their mortgage when they begin thinking about refinancing. If you’re able to decrease the length of your refinanced loan from 30 years to 20 or 15 years, you will be eligible for even better interest rates, which means you can save even more on your new home loan. Not only could you pay off your loan sooner than you might have, but you could still have a lower monthly payment.

In the current market, we can offer 3.25% interest for a 15-year fixed mortgage and 3.99% for a 30-year fixed mortgage. Since a 0.2% difference in interest can save tens of thousands of dollars, moving from a 30-year fixed mortgage to a 15-year fixed mortgage can often save you hundreds of thousands of dollars, depending on when you refinance, and whether or not interest rates have decreased.

3. Even though you’ve been making your mortgage payments on time, you want to make a lower monthly payment.

Earlier, we mentioned that your monthly payment could be lower simply from refinancing if the interest rate is lower. However, another thing that can lower your monthly mortgage payment is extending the term of payment. If you have already paid on your mortgage for 5 years, you can spread out the remaining balance over 30 more years if you refinance. Even if the interest rate doesn’t change, you can still pay hundreds less per month.

For example, if you had a home loan of $300,000 at 3.4% interest that you were considering refinancing after 10 years, you could refinance and have a new home loan that also had a 30-year term. In this instance, you would have already paid $68,000 of the principal after 10 years, so your new loan would be for $232,000. If you wanted to pay the remaining balance over 30 more years, you would be paying an average of $1,450 per month instead of continuing to pay $1,750 per month.

Key Takeaways

In all, if you have at least a third of your mortgage left, and interest rates are going down, it’s worthwhile to consider refinancing. Remember, the amount of the principal that you’ve already paid off is paid off for good, so the balance of your refinanced home loan will be less. You can make refinancing work for you and your financial goals, whether that’s paying less per month, paying off your mortgage in fewer years, or saving money over the length of your mortgage.